Who taught you about money management? School, your parents, no-one at all? The latter seems to be the case for most of my generation, with the majority muddling along working it out for themselves and trying to get to grips with budgeting, saving and understanding how interest works as they progress through life, often learning from their mistakes.
I’m not sure things have changed much since. Financial education is still largely absent from school curriculums, although that may be changing slowly in some countries, such as the UK, which has introduced My Money Week to promote money management skills in primary and secondary schools.
Nevertheless financial education is usually left to parents who often lack skills and knowledge themselves. It’s hardly surprising that scores of people are finding themselves with unmanaged debts, struggling to keep their homes, vulnerable to financial crime, which is skyrocketing and living out their final years in poverty.
In 2017 the OECD carried out a global study into financial literacy, covering the G20 countries. The findings were pretty horrifying, unless you are a financial scammer, in which case the report is positively encouraging! It concluded that ‘Many people do not have basic financial knowledge’. To give two concrete examples:
- Only 27% of respondents were able to calculate both simple interest and recognise the additional benefit of compounding over five years.
- Four in ten people did not understand diversification.
These shortcomings could have some pretty major ramifications. The first is a crucial concept to grasp in order to understand why paying the minimum repayment on credit cards each month is a terrible idea while the second is important when it comes to making the most of savings and protecting wealth. This has become all the more essential because more and more people are being forced to take on the responsibility for their personal financial security in retirement and it is vital that they understand the impact the financial decisions they make today will have on their future.
Educating your children about everyday money matters could make a huge difference to their future. From a young age, they are bombarded with adverts encouraging them to spend and as they get older they will receive offers of loans and credit cards and be subjected to numerous scams designed to trick them. We need to arm them with the tools they need to become financially empowered so that they can fly and fulfil their dreams rather than just getting by.
A third of those questioned in the OECD survey had faced a situation where their income didn’t cover their living costs in the last 12 months – none of us want our children to be in that third so here are a few tips on protecting your kids from financial disaster:
- Start young
- Children understand the value of things, including monetary value, much earlier than we think. Adverts and peer pressure play a big role so you need to counteract those influences with more positive ones of your own from a young age. Let your young child help you make simple decisions about money, such as choosing between a more and less expensive brand of biscuit, to get the ball rolling.
- Pocket money
- Giving your child pocket money can teach them important lessons about prioritising, which is key to spending sensibly and having money left over to save. If a child has a finite amount to spend rather than viewing mum or dad as a bottomless pit of money, they must choose what to spend it on carefully. If they blow it all on sweets, they won’t be able to also buy the football stickers they want. They will learn that spending without careful thought might mean going without something that they really want. As they get older, you can give them an allowance to cover a wider range of needs such as clothes, mobile and socialising. With more expenses to cover they will need to budget more carefully and this will prepare them for the day when they have to fly solo managing their own finances.
- Instilling a savings habit is a precious gift to your child which will hopefully set them up for financial security later on. Start with a piggy bank and graduate to a savings account specifically for kids. Teach them about interest and how it works for both savings and debt. When they are old enough help them get to grips with online banking and teach them how to manage passwords, spot suspicious emails and use online tools safely.
There is loads more advice to help your child learn about money at this link. It’s definitely worth spending some time on this as habits which they pick up when children are likely to stay with them into adulthood and set the scene for a financially secure life through all its different stages.
I have over 20 years of experience in the financial services industry and hold a Chartered FCSI qualification. I ensure that our operations are fully compliant with the rules of our most stringent regulators.